15 February 2000 External T.I. 1999-0006995 - CHARITABLE REMAINDER TRUSTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

1. Elections under 110.1(3) and 118.1(6) in respect of transfers to charitable remainder trusts.

2. Is income earned in a charitable remainder trust exempt from taxation.

Position:

1. Elections available in certain circumstances

2. A CRT is either a testamentary or inter-vivos trust and not specifically exempted from taxation. The income may be taxed in the hands of the beneficiaries if the appropriate elections are made under section 104.

Reasons:

1. Position in IT-226R.

2. The Act

XXXXXXXXXX 						1999-000699

Attention: XXXXXXXXXX

February 15, 2000

Dear Sir:

Re: Charitable Remainder Trusts

We are writing in response to your letter of September 20, 1999 in which you requested our comments on certain taxation issues related to charitable remainder trusts. If you are considering these issues in connection with specific transactions, you may wish to submit a request for an advance income tax ruling in the manner set out in Information Circular 70-6R3, Advance Income Tax Rulings. We will however, provide you with general comments which, we will caution you, are not binding on the Agency with respect to a specific set of facts.

Charitable Remainder Trusts

Charitable remainder trusts are not an entity specifically dealt with under the Income Tax Act. It is a widely used term for a trust structure (testamentary or inter-vivos) in which a qualified donee as described in subsections 110.1 and 118.1, has an interest. We are of the view that where property is transferred to a trust and a qualified donee is given an equitable interest in the trust such that they are entitled to receive the capital property held in the trust at a time when there are no further income beneficiaries, a gift may have been made by the settlor of the trust to the qualified donee. The property which we consider to have been gifted to the qualified donee is not the property actually transferred to the trust by the settlor, but rather the equitable interest in the trust. The trust has received the property. The qualified donee has received an interest in the trust. When the income interests end and the property held in the trust is transferred to the qualified donee as capital beneficiary, the transfer of property is generally one to which subsection 107(2) would apply. Subsection 107(2) generally applies when property is distributed to a beneficiary of a trust in settlement of that beneficiary's capital interest in the trust.

In order for a gift of an equitable interest in a trust to have been considered to have been made to a qualified donee, the transfer of property to the trust to satisfy the qualified donee's capital interest must be irrevocable and the right of the qualified donee to receive the property held by the trust at a future date must vest, such that the right may not be taken away from the qualified donee at a future date. It is also important that the interest in the trust be given voluntarily with no expectation of right, privilege, material benefit or advantage to the donor or a person designated by the donor.

Valuation of Gift

For the purposes of subsection 110.1(1) and 110.1(3), it is necessary for the value of the gift to the qualified donee to be determined. This means that the value of the equitable interest in the trust that was the gift to the qualified donee must be valued. In valuing the equitable interest in the trust, some of the factors which should be considered are, the nature of the property held by the trust, the age of the income beneficiaries, interest rates, mortality tables, and anticipated future economic conditions. In the case of some types of property held by a charitable remainder trust, such as shares, a reasonable determination of the fair market value of the equitable interest in the trust may not be possible. In some trust situations, the life tenant or trustee has a right to encroach on the capital of the trust and in such situations, it would not be possible, to reasonably determine the value of the capital interest in the trust. A qualified donee is not permitted under the Act to issue a donation receipt where it cannot reasonably determined the value of the gift nor can it issue a receipt for more than the fair market value of the property it received and therefore, could not issue a donation receipt for an amount greater than the fair market value of the equitable interest in the trust.

Transfers of Property to Charitable Remainder Trusts

Under the provisions of the Act, it is our view that when property is transferred to a charitable remainder trust, it is the entire property that is being transferred to the trust. It is therefore, the entire property that is being disposed of by the settlor of the trust, and the entire property that must be considered in determining whether the taxpayer has a capital gain or loss. Subsection 110.1(3) in respect of corporations and subsection 118.1(6) in respect of individuals, only apply in respect of property transferred to a qualified donee, and as stated above, the property transferred to the qualified donee is the equitable interest in the trust and is not the property being settled in the trust.

Notwithstanding the technical wording of subsections 110.1(3) and 118.1(6), in such circumstances IT-226R, administratively allows a taxpayer to utilize these provisions, subject to an important qualification. Paragraph 8 of the IT provides that as a general rule the amount elected upon in respect of the property will be regarded as both the proceeds of disposition in respect of the property and the amount of the gift of the residual interest in the trust to the qualified donee. However, in situations where the elected amount is greater than the fair market value of the residual interest in the property, the elected amount will represent the taxpayer's proceeds of disposition for the purposes of determining any gain or loss on the transfer of the property to the trust, but the amount of the donation eligible for a tax credit will not be more than the fair market value of the residual interest. The Agency cannot administratively allow a donation tax credit based on an amount which exceeds the actual value of a gift received by the charity. As well, a qualified donee cannot issue a donation receipt for more than the fair market value of the property it receives. These comments are intended to clarify the Agency's position with respect to paragraph 8 of IT-226R, which is presently under review.

Capital Gains Realized in the Trust

There is no provision in the Act, which would deem a charitable remainder trust to be an entity that is exempt from taxation. A charitable remainder trust is either a testamentary trust, or an inter-vivos trust, but is not a tax exempt trust. Any net capital gains earned by the trust, would be subject to taxation in the trust. The trust may however, under subsection 104(21), designate the capital gains to have been paid out to the tax exempt capital beneficiary of the trust, such that the capital gains realized by the trust would considered capital gains of the tax exempt beneficiary.

The comments in this letter are of a general nature and to the extent we have not commented on issues addressed in the industry publication attached to your letter, no inference should be made as to whether we agree or disagree with the comments raised in the publication.

We trust that our comments will be of some assistance.

Yours truly,

F. Lee Workman
Manager
Financial Institution Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch